How can I show a profit when I don't have any money in my account?

by Jenni
(Houston, TX)

I use an accounting service, and they gave me my yearly financial statements which show a nice profit. The only trouble is I have to pay taxes on that, and I don't have much money left in my checking account.

How can I be earning a profit and not have any money?

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Jenni,

Thanks for your question!

Yes, it is possible to earn a profit without having extra money leftover. This is very frustrating, I know.

How?

Some items you pay do not affect your bottom line, or profit. Let's take a look at a few small business bookkeeping examples.

For example, loan principle paid. Interest is an expense, but the principle portion of the payment is a reduction to a liability, your Note Payable, so would not reduce your income.

Any equipment or furniture you purchased would be an asset, and would not be deducted from your income. (Unless you depreciated it all at once using Section 179).

You may deposit money into a savings account or investment account during the year, this would not reduce your income or show up on your Income Statement either.

Are you a sole proprietor? Any payments to yourself throughout the year are considered 'Owner Equity Draws' and do not reduce your income.

These are just a few small business bookkeeping examples of transactions that use cash but do not reduce your income. Any transaction affecting an asset, liability, or equity item will not reduce your income, or lower your profit.

Thanks for contributing, Jenni! If I can be of further help just let me know! Kathy